By David Hargreaves
First, I'll tell you what this piece is NOT going to be. It is NOT going to attempt to do a crystal ball number with our housing market.
Yours truly has attempted that on previous occasions and found himself looking at cracked glass.
It is though worthwhile as 2018 starts to get into swing to assess some of the most important factors that go into influencing the direction of the housing market.
First, it's worth considering what those factors actually are. I don't claim the following is exhaustive, but it covers a fair few bases.
Government is a category all of its own when it comes to the housing market, since it can implement a variety of policies and set any sort of rules it wants.
And this factor is going to be super important this year. We've come off nine years of a Government that's largely washed it hands of the housing market so far as any demand-side pressures were concerned.
Talking the talk
This Government is talking the talk of course when it comes to both supply and demand, with promises of Government-supported building programmes, while on the demand side there's already legislation pending to block offshore buying of existing houses. That measure's impact is likely to be very slight in a 'real' sense but might have a bigger impact than you would readily give it credit for just in terms of signals.
Then there's the Reserve Bank. The previous Government left all the dirty work to the RBNZ in terms of trying to tackle the demand side pressures in the housing market. The RBNZ has two potential big spheres of involvement with the housing market, both having an impact on demand, but both, strangely with very different objectives.
Under its monetary policy brief the RBNZ sets tone for interest rate levels with its Official Cash Rate (OCR). Rises or falls in the OCR can make it either harder or easier for house buyers to service a mortgage.
The flip side to this is the RBNZ's financial stability mandate. And it's under this umbrella that the RBNZ has been deploying its loan to value ratio limits - the LVRs - in order, effectively to reduce the amount of risk the banks are taking on. But this of course does have the impact of stifling demand - as seen most notably with the 40%.
So, between them the Government and the RBNZ are two very important rule setters.
Banking on banks
Then there's the banks. They are important of course because it's up to them to lend the money that buys the houses. Their appetite for doing so has dropped from the voracious levels seen in recent times - and not just because of the curbs being placed on them by the RBNZ and its LVRs.
Our biggest banks are Australian, and subject to now more stringent capital requirements at home - which is having an influence on what they do here. Secondly there was last year a significant drop off in the rate of new deposits for the banks, which meant the banks either had to bridge the gap with money borrowed offshore, or, alternatively, reduce the amount of money they loaned - or charge more for it. They ended up doing a bit of both.
Building activity has been something the previous Government sought to facilitate mostly through encouraging easier planning approval processes. Fair to say results have been at best mixed. New building has risen appreciably from the barely existent levels seen at the nadir in 2011, but the growth has stalled in the past 18 months. While the building consent figures for the full 2017 calendar year won't be out till early next month, they are likely to show consents figures both nationally (at maybe say about 31,500) and in Auckland (probably over 10,500) at levels last seen in 2004 (well, Auckland's figures were somewhat higher that year at over 12,000, but the national figure was 31,500).
Interest rates are a product of some of those factors and entities talked about above. The OCR didn't move from it's historically low 1.75% last year, but mortgage rates did shift upwards somewhat due to the aforementioned bank pressures.
Inflation's important because the presence or non-presence of it is the arbiter of whether interest rates will move up or down, or at all.
Migration is significant. If people leave the country there's less need for housing. If a lot come in there's need for more housing. Obviously we've been in the 'a lot come in' category in the past few years, helping to put pressure on particularly the Auckland market.
So, there we go. I'm sure there's other things you can think of that help to go into the 'mix' in terms of setting the tone for the housing market. But certainly the factors mentioned here are all significant components.
And in looking at them all going into this year, the clear thought that emerges is that a number of them are heading in differing directions - that is, some are conducive for a more active and rising housing market, and others are not conducive.
I think whatever the Government does or doesn't achieve this year in its efforts to ramp up the supply of affordable housing will be key. Any wannabe housing investors are likely to sit on their hands this year till it starts to become clearer what the Government will be able to achieve. Personally, I remain unconvinced as to what the Government's efforts will achieve. I suspect the Government will end up 'taking up the slack' and effectively substituting itself in the place of would-be private development. So, whether the overall building figures get the massive incremental upward shift indicated by the Government's policies is a key question to be answered.
Theoretically the Government's building programme should put downward pressure on the housing market. But if the Government simply ends up replacing a lot of private sector activity the credibility of what it's trying to do may become damaged and the housing market may start to tighten up again anyway, price wise. So, it really does depend on how well the Government can do. As I say, I'm still not convinced.
Loosening up on the LVR front
The Reserve Bank has already loosened the LVR limits both for owner-occupiers and housing investors, as from January 1. So, this should be a bit more conducive for the housing market - as theoretically it makes it a bit easier for people to borrow. But of course, whether people want to also depends on things like the above Government policy on new building. But, no doubt, after being such a meanie these past few years, the RBNZ will be being seen in a kinder light right now. And it's possible more loosening of the restrictions will follow.
The RBNZ should also be bearer of glad tidings on the interest rate front this year too. The lower than expected inflation figures for the December quarter have now got most economists taking any potential OCR rises off the table for this year. Inflation's expected to remain very benign. No economists I know of are at this stage talking of the possibility of the OCR being actually REDUCED - but personally I would not rule out that possibility if inflation really doesn't re-emerge later this year. One potential fact that might change the picture there is increasing expectations of wage rises - which I think we will see. Hey, it IS a Labour-led Government.
Now of course the RBNZ sets the tone for interest rates with the OCR, but as we saw with some mortgage rate increases last year, the banks will not slavishly follow the OCR - if they have their own specific funding requirements to meet. But there's some fairly encouraging news on this front too. The big squeeze that appeared to be on last year seems to have alleviated. More deposits have been flowing into the bank coffers in recent months and therefore conditions appear now to be more conducive certainly for now more mortgage rate rises and possibly for some increased lending - particularly with the LVRs being loosened a bit. So, again that's potentially a positive for the housing market.
But of course one of the biggest pushes for the market in recent years has come from the influx of migrants. The latest migration figures are out late this week. And they should be interesting.
Based on Stat's NZ's seasonally adjusted figures, around a year ago, we had a net migration inflow on an annualised basis of about 72,000. If you average the four months’ worth of seasonally adjusted figures from August through November 2017, this inflow was down to around 65,000 to 66,000 a year. That's still high historically, but definitely showing signs of turning. My pick would be that there will be a step up in the number of kiwis heading offshore on a permanent or long term basis this year, coupled with less people coming in.
The rise in net migration figures took all economists and observers by surprise. I think the rate of decline might as well. Clearly if there is a significant shift in migration patterns then this is a negative for the housing market - since it lessens demand.
So, this is all looking like a very mixed bag.
In general terms over the next 12 months Government policies are looking like they could be a drag on the housing market, if the building programme gets traction - while the offshore buying ban assuming it is passed could be, while seemingly only symbolic, be a factor in 'putting off' would-be foreign buyers and possibly migrants too - if NZ is suddenly seen as 'non migrant-friendly'. Of course I'm view this from the mercenary perspective of house values and the holding of house values. If young people can actually afford to buy homes then that is fantastic, isn't it.
A supportive RBNZ
But to continue. The RBNZ actions this year are likely to be supportive for the housing market - in the sense that the home buyers will be freed up somewhat by the more loose LVR restrictions, with possibly more to come, while interest rates are unlikely to move. Certainly not up anyway.
It's hard if not impossible to read what the banks will do, but I would say the chances are fairly good there will be some relaxation in their lending criteria this year. If they are not having to worry as much about funding pressures then the natural inclination to fight for market share will become stronger again, which would be conducive for the housing market.
All in all there is plenty to think about. It is not the one-way street of a few years ago where we had the incendiary housing market conditions that saw banks competing for market share and throwing the money around, where interest rates were falling, where building activity had not recovered from the very low post-GFC conditions, where migrants were starting to flow into the country and where still-hard-to-quantify, but probably appreciable numbers of offshore buyers were climbing in.
That was all a one-way ticket to rising prices. This year with the various constituent parts moving around and in some instances in opposite directions matters are far less clear. I don't think it is going to be dull though.